Demand Forecasting: Need, Objectives, and Methods
Definition of Demand Forecasting
Demand forecasting is the process of estimating future demand for a product or service. According to Evan J. Douglas, it is “a process of finding values for demand in future time periods.” Cundiff and Still define it as “an estimate of sales during a specified future period based on proposed marketing plan and a set of particular uncontrollable and competitive forces.”
Need of Demand Forecasting
Demand forecasting is essential for making informed business decisions and minimizing risks. It helps organizations in various aspects:
- Fulfilling Objectives: Organizations set targets and use demand forecasting to determine if these goals can be met. For example, if a company aims to sell 50,000 units, it will forecast demand to see if this target is achievable.
- Preparing the Budget: Forecasting helps in estimating future revenues and costs. For instance, if an organization forecasts selling 100,000 units at $10 each, the expected revenue would be $1,000,000.
- Stabilizing Employment and Production: By predicting future demand, organizations can manage production schedules and workforce requirements to avoid overproduction or underproduction.
- Expanding Organizations: Forecasting future demand helps in planning business expansion. If high future demand is expected, the organization may decide to expand production facilities.
- Taking Management Decisions: It aids in decisions regarding plant capacity, raw material procurement, labor, and capital requirements.
- Evaluating Performance: By comparing forecasted and actual demand, organizations can identify discrepancies and take corrective actions, such as improving product quality or increasing advertising.
- Helping Government: Demand forecasting assists governments in planning import and export activities and regulating international trade.
Objectives of Demand Forecasting
The objectives differ for short-term and long-term forecasting:
Short-Term Demand Forecasting:
- Production Policy: Helps in creating production plans to avoid overproduction and shortages.
- Expenditure Pattern: Assists in managing raw material purchases and inventory control by predicting near-future economic conditions.
- Sales Policy: Helps in formulating sales strategies.
- Price Policy: Guides pricing decisions based on expected market conditions.
- Sales Targets, Controls, and Incentives: Used to set and monitor sales targets and establish incentive plans.
- Financial Requirements: Helps in predicting short-term financial needs based on production and sales forecasts.
Long-Term Demand Forecasting:
- New Unit or Expansion: Assists in planning for new units or expanding existing ones.
- Financial Requirements: Aids in long-term financial planning by estimating future financial needs.
- Manpower Planning: Helps in arranging training and development programs for personnel based on long-term demand forecasts.
Methods of Demand Forecasting
- Survey of Buyer’s Choice:
- Complete Enumeration Method: All potential buyers are surveyed about their future purchase plans.
- Sample Survey Method: A scientifically selected sample of potential buyers is surveyed.
- End-use Method: Forecasts demand for inputs by estimating future consumption levels based on targeted output.
- Collective Opinion Method:
- Sales personnel estimate future sales in their regions. These estimates are aggregated and reviewed considering various factors such as price changes, competition, and consumer purchasing power.
- Barometric Method:
- Uses past demand data to predict future trends. Economic indicators (leading, lagging, and coincidental) are analyzed to forecast future demand.
- Market Experiment Method:
- Conducts market studies and experiments under controlled conditions to observe consumer behavior and forecast demand.
- Expert Opinion Method:
- Utilizes the expertise of market experts. The Delphi technique involves multiple rounds of questionnaires sent to experts, whose opinions are shared to reach a consensus.
- Statistical Methods:
- Trend Projection Method: Uses past sales data to predict future demand by analyzing time series trends.
- Regression Analysis: Establishes a relationship between demand (dependent variable) and factors like income, prices of goods (independent variables). The regression equation Y = a + bX helps in forecasting demand.
Summary
Demand forecasting is a crucial tool for businesses to plan and make informed decisions. By understanding and predicting future demand, organizations can optimize production, manage resources efficiently, and achieve their strategic objectives. The methods of demand forecasting range from direct surveys to complex statistical analyses, each suited to different contexts and requirements.